Why We Cut Our Price Estimate For Qualcomm

by Trefis Team
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We are reducing our price estimate for Qualcomm (NYSE:QCOM) from around $70 per share to about $65 per share, to account for the multiple legal threats faced by its lucrative patent licensing unit, QTL. The company is currently entangled in legal battles with the U.S. Federal Trade Commission, which has alleged anti-competitive practices relating to its industry-standard wireless patents, as well as its largest customer, Apple, which is targeting the wireless giant’s licensing practices that require chip customers to also pay licensing fees for its patents. The lawsuits pose a significant risk for Qualcomm, given that it has been growing more dependent on its licensing business (QTL accounted for a massive 78% of its profits before taxes in FY’16, compared to around 63% two years ago).

See our complete analysis for Qualcomm

Results Of QTL’s Recent Litigation Paint A Tough Picture

The outcome of recent litigation relating to the QTL business do not provide much cause for optimism. For instance, Qualcomm was fined about $975 million by Chinese authorities in 2015, while the Korea Fair Trade Commission fined the firm $854 million last year (though Qualcomm is contesting the fine). Erstwhile smartphone major BlackBerry also won a $815 million arbitration award from Qualcomm in April. There is a possibility that the litigation with the FTC could result in a fine or potentially cause the company to modify its technology licensing practices. A negative outcome from the Apple litigation could also hurt Qualcomm, as Apple’s royalties are estimated to account for as much as 30% of its earnings. Moreover, it could set a precedent, causing the company to make concessions with other smartphone vendors as well. While Qualcomm’s patents are essential to industry-wide wireless standards, implying that most modem/smartphone manufacturers need to license them anyway, there is a possibility that the business may not be as robust as it once was.

Why We Still Remain Bullish On Qualcomm

That said, we still remain bullish on Qualcomm with a price estimate that is about 20% ahead of the current market price. The company has been entering new markets such as autonomous cars, server and PC chipsets, while venturing into other areas in the smartphone supply chain, such as ultrasonic fingerprint sensors. Qualcomm recently announced plans to support Microsoft’s Windows software on its ARM-based chipsets, allowing it to play a larger role in the PC market. Qualcomm is looking to compete with Intel in the server space, with its first ARM-based server processor, Centriq 2400 (related: Qualcomm Advantageously Positioned To Compete In The Server Chip Market). Moreover, the company’s planned acquisition of NXP Semiconductors could help it to diversify its product offerings, while providing it an entry into markets outside its core mobile chip set business.

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